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Mutualist Blog: Free Market Anti-Capitalism

To dissolve, submerge, and cause to disappear the political or governmental system in the economic system by reducing, simplifying, decentralizing and suppressing, one after another, all the wheels of this great machine, which is called the Government or the State. --Proudhon, General Idea of the Revolution

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Location: Northwest Arkansas, United States

Sunday, November 20, 2005

Cooperative Pooling of Capital

Excellent article by Kevin Potvin of The Republic, "Vancouvers opinionated newspaper."

It’s accepted as axiomatic these days that small retail businesses will forever struggle to stay afloat. Mine, a specialty magazine and book store called Magpie Magazine Gallery in Vancouver’s funky Commercial Drive district, is twelve years old and still I feel like a short trip out of town, and out of cell phone range, could end with me finding the sheriff’s note posted to my front door.

And yet, my small independent store in this lower-rent street generates as much revenue per square foot as is achieved in Canada’s best-performing mall, the Pacific Centre, in downtown Vancouver. All my business neighbours feel as provisional as I do, but taken together, our roughly 12-block strip with about the same amount of total floor space as an average WalMart, generates more revenue, raises more gross profit, achieves a better net profit on revenue, employs way more people, provides a much wider range of goods and services, and contributes much more to the civic common good than that average Walmart.

So why is WalMart the most valuable company in the world while the stores of Commercial Drive, if put on the market all together today, would fetch in total a tiny fraction of what each WalMart store is worth? And why are WalMart owners sitting so pretty in the top ten of the world’s most wealthy, while I and a lot of my business neighbours eye the official poverty line with daily wariness?

I argue that it’s because the equity in small neighbourhood businesses is hidden and locked away, denying small business owners the benefits of access to investment and working capital so critical to the prosperity and success of large companies.

Potvin's proposal:

My solution is to entice a large enough group of businesses in some commercial district to set up a cooperative company that creates a subsidiary investment holding company that engages in stock swaps with each of the participating small businesses such that the holding company comes to own 49% of each small business while the small business owners each come to own some equitable part of the overall holding company. Neither the investment holding company nor the coop that controls it would ever gain controlling interest in any one of the small businesses, but the investment company itself would be one with considerable clout if it came to represent 49% of the interests of an entire district like Commercial Drive....

The holding company could additionally provide benefits to its owners by taking advantage of the economies of scale it could achieve on purchases of business supplies and services like insurance, courier costs, accounting contracts and more.
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6 Comments:

Blogger alan said...

Great post. I've entertained similar ideas for sometime. Commercial clusters formed this way would certainly make a more level playing field for local retailers over against the Wal-Marts and Targets of the world.

Potvin is suggesting this initiative be a municipally sponsored economic development initiative. Here in USAmerica, and I suspect this is similarly true of Canada as well, securities law provides (in the form of the "3A2 exemption") that political jurisdictions can issue securities, any kind of security, be it debt or equity or anything inbetween, and may sell it using general solicitation...meaning they can advertise it and sell it to anyone, whether accredited or not. This basically means that a county or municipality can act as a conduit for investment in private enterprises if the security is designed right. The right security, in this case would be an interest in a limited partnership, would buy assets to rent to retailers, be it real estate, be it inventory, be it equipment, whatever, for a percentage of gross revenues. The General Partner could be an LLC whose members are the participating merchants, and the municipality could itself act as an "administrative general partner" in order to look out for the public interest.

November 20, 2005 9:19 AM  
Blogger brian said...

This wouldn't end up warped into a de-facto cartel?

November 20, 2005 6:50 PM  
Blogger Kevin Carson said...

alan,

Actually, the role of municipal government was the one aspect of Potvin's plan I didn't like. But it seems to me it could be done by the participating businesses with their own money.

brian,

I don't think cartels generally are very viable unless they're promoted or enforced by the state. Small businesses with low capitalization and labor-intensive methods are, it seems to me, about ideal from the standpoint of low entry barriers.

But I'd also recommend, along with such pooling of local business resources, an end to entry barriers to self-employment for those with little resources beyond their own labor (anti-jitney laws, for example, and safety codes that unreasonably restrict self-built houses). Such barriers are one way the "respectable" business community has used government to shut out competition for years.

November 22, 2005 9:21 AM  
Blogger alan said...

Kevin wrote:"Actually, the role of municipal government was the one aspect of Potvin's plan I didn't like. But it seems to me it could be done by the participating businesses with their own money."

Understood. And I agree, it can be without municipal assistance. I'm looking at the matter from the standpoint of securities law and the Community Reinvestment Act ("CRA"). The best situation possible for selling a security is being freed of the need to register an offering, being free of the requirement of having mostly accredited investors and being free to advertise your offering to anyone anywhere, not just your own state via an "intrastate" offering. The convergence of the 3A2 exemption and CRA provisions for Community Development Companies is as much the perfect convergence as it gets. In anycase, whenever a company is declared by a political jurisdiction to be a Community Development Company, that company has a relatively free hand in how it designs its security and how the issue is raised. In the case where a municipality or county would act as a conduit for a fund investing in a portfolio of businesses and assets, there is no need for the sponsoring political subdivision to have direct involvement in the management of businesses or the day-to-day operations of such a fund.

November 23, 2005 8:35 AM  
Blogger Kevin Carson said...

alan,

The "accredited investors" requirement you mentioned, especially, is one of the most onerous burdens for mobilizing capital in a producers' co-op.

November 24, 2005 9:08 AM  
Blogger alan said...

You bet its very limiting!

What are we left with...legally? We can do intrastate offerings...no investors from outside our state. But it is so easy for an outsider to sneak in..so our ass is in court over that. And maybe whatever state we're in will not let us do it. But let's assume we take instrastate offering route.

Well, at least we could sell it to anybody within our state. That's good. Ok....what if we set up a BDC just to invest in our state with investors just from our state. A BDC ("Business Development Company) is a closed-end mutual fund that invests in private companies. Could be wonderful stuff for local and regional economic development. Oops...Feds won't let us do a very good job of it...they'll limit the amount we can raise to...if I recall this correctly 20 Million dollars or so. Oh, you can ask the Federal SEC to raise the limit.

November 25, 2005 2:44 AM  

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